On 22 July 2022, the Department of Finance closed a public consultation on the Ireland’s implementation of Pillar Two based on the draft EU Minimum Tax Directive.

Pillar Two consists of two interlocking domestic rules, the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR) which will introduce a global minimum effective tax rate of 15% for in scope groups. An in-scope group is one where constituent entities located in a Member State of the European Union are members of an MNE or a large-scale domestic group which has an annual revenue of EUR 750,000,000 or more, including the revenue of the excluded entities.

While the final text of the Directive has not yet been agreed by all Member States, it is expected that the Directive once agreed will be transposed into law by the end of 2023. From an Irish perspective therefore, we can expect to see the Pillar Two rules transposed into law in Finance Bill 2023 where agreement on the Directive is ultimately reached.

General Comments

As an overarching observation, Ireland has been a major beneficiary of globalisation in recent years. Given the significant tax contributions made by MNE’s in Ireland, Pillar Two poses a significant risk to our finances. The Department of Finance has estimated that international tax reforms could reduce Ireland’s corporation tax base by up to €2 billion. Accordingly, other areas of the Irish tax system and our economy in general must be adequately served to ensure that Ireland remains a competitive location in which to invest and grow businesses both from the perspective of inward investment and also domestic indigenous growth. Considerations such as high marginal personal tax rates in Ireland, the existing complexity of Irish tax legislation and incentives to drive innovation and growth in the knowledge economy are, in our view, crucial to securing our future competitiveness on the global stage.

While further detail and commentary may be found in the Deloitte submission here, the key points raised are summarised below:

• A core consideration for many MNEs with a US footprint will likely be whether the GILTI (“Global Intangible Low Taxed Income”) is considered a Qualified Income Inclusion Rule. While uncertainties remain as to whether the proposed amendments to GILTI to align the US rules with Pillar Two principles, where GILTI is ultimately not regarded as a Qualified Income Inclusion Rule we would argue that GILTI taxes should nevertheless be treated as Covered Taxes and allocated to the Irish constituent entities accordingly. Further consideration will need to be given as to how exactly GILTI should be apportioned across the various countries. For example, the GILTI taxes may be apportioned on the basis of profits.
• The attractiveness of the Knowledge Development Box (“KDB”) may be eroded as a result of the Pillar Two rules, with a minimum effective tax rate of 15% resulting in a top up tax for companies availing of such reliefs. To preserve a benefit from the KDB, amendments may be considered to the form in which the relief is granted. Such an amendment would give relief not as a deduction from taxable profits but as a tax credit calculated as a percentage of qualifying profits.
• It is questionable whether the current R&D tax credit regime would fall to be regarded as a “qualified refundable tax credit”. Adjustments will be necessary to the R&D credit in order to limit it being negatively affected by the Proposed EU directive.
• Further definition and clarity are required in a variety of areas including the meaning of “excluded entities” as they pertain to Irish real estate investment vehicles and in the meaning of “annual revenue” in determining whether an MNE is in scope for the rules.
• A similar comment can be made with respect to the meaning of “covered taxes”, a core component in calculating the effective tax rate for a constituent entity, including bringing about greater clarity on the meaning of a “total deferred tax adjustment amount”.
• The mechanism to address temporary differences contained in the proposed Directive (also referred to as the “recapture rule”) may cause practical difficulties for companies claiming capital allowances for expenditure on certain intangible assets. Consideration should be given to whether the recapture rules are meant to apply to such cases.
• Overall, the introduction of a qualified domestic top up tax (QDTUT) in Irish law as provided for by the Directive would provide for a measure of simplicity for foreign parented groups. The QDTUT could reduce the compliance and administrative burdens on MNEs generally and should therefore be considered.
• Lastly, any top up tax (whether collected via the IIR, UTPR or QDTUT) should be collected separately from the corporation tax return for an entity (the Form CT1). We would also recommend against the introduction of preliminary tax payment obligations in respect of top up tax arising under Pillar Two.

Next steps

Ultimately, the Pillar Two rules should be legislated for so as to provide simplicity (so far as possible) and clarity, so businesses can understand how much tax they should be paying, and also to provide certainty so that businesses can plan ahead. While Ireland should faithfully implement the Directive, we would recommend that Ireland does not go any further than is necessary to comply with the Directive. We are a small open economy, and we need to be cognisant that any provisions more onerous than those prescribed in the Directive will put us at a competitive disadvantage relative to our competitors.

We would recommend that the full text of the proposed draft legislation is circulated as early as possible as part of a Feedback Statement process in order that taxpayers, practitioners, and other stakeholders have an opportunity to provide feedback on same thus ensuring matters are dealt with in a timely manner.

While the Directive has not yet been agreed to by all Member States, we would expect that once the rules are finalised that we can begin to see steps being taken by the Department of Finance to provide for Pillar Two in domestic legislation. Where the Directive is agreed, we may see Pillar Two rules provided for in Finance Bill 2023 following a period of consultation and feedback from stakeholders. We will continue to watch this space with interest.

Should you have any query on the potential impact of the proposed changes to you or your business, please do not hesitate to reach out to your Deloitte contact for further information.